Diversifying your investments, in terms of asset class, geography and risk level, is one of the best strategies for protecting your wealth while also maintaining attractive growth potential. The problem is that diversification can be tricky to achieve and sometimes difficult to maintain from an emotional standpoint. Here, Taher Fakhri, Friends Provident International’s (FPI) Middle East regional compliance and risk officer, reveals why non resident Indians (NRIs) should temper their enthusiasm for traditionally held investments such as gold and property:
The seminal study by Beebower, Brinson and Hood in 1986 on ‘Determinants of Portfolio Performance’ concluded that asset allocation contributes to over 90 per cent of investment performance and is the single biggest factor driving returns. This report is still relevant today for both institutional and individual investors and is often referred to within asset management circles.
Recent FPI research suggests certain strongly-held attitudes by NRIs about investment options such as residential property and gold may affect their judgement when assembling their portfolios.
For example, it can require enormous self-restraint to resist the temptation to forget all the good stuff about diversification when a really tempting, seemingly sure-fire investment opportunity presents itself.
And for NRIs, the challenge of diversification can be extra bewildering, because complications that simply don’t exist at home can come into play when investing abroad.
Currency complications
Whether you invest the money you are making while away from India in Indian investments (necessitating an exchange into rupees from one’s current local currency), or in investments where you are living now, with the intention of selling them later on, if and when you return to India - you could face currency issues.
Over time, one or the other of these currencies is likely to appreciate significantly against the other, affecting your investment. And so the question then becomes, do you ignore this fact, or undertake a currency hedge?
Property ownership
Yet another necessary consideration, depending on where an NRI investor lives, can be rules about owning property in their country of residence. Most foreigners in Singapore and Hong Kong are obliged to pay a higher stamp duty when purchasing property than locals do, reducing the appeal of buying a residence while living there.
In the UAE, permanent resident status is not available to foreigners, so investing there needs proper consideration.
These factors are almost certainly the reason that when we surveyed NRIs in Hong Kong, Singapore and the UAE, 60 per cent of those living in the UAE said they held most of their investments back in their home country, compared with just 33 per cent in Singapore and 40 per cent in Hong Kong. In the latter, a third of NRIs surveyed held all of their investments locally in Hong Kong.
Home market attitudes
As if this weren’t enough, many NRI investors have something else to contend with when they seek to diversify their investment portfolio: their own attitudes and attachments towards certain asset classes.
Take gold. Unlike, say, most Americans or Europeans, Indians are strongly predisposed to buy and hold the precious metal – so much so that India was the second-largest consumer of physical gold after China in 2013, after holding the top spot previously, according to the World Gold Council.
We are all aware of the Hindu holy day, Akshay Tritaya, when it is traditional to buy gold, a fact that is not lost on jewellery stores, which remind would-be buyers when the auspicious day for buying the precious metal is approaching.
Indian investor’s predisposition for gold is perhaps partially explained by the fact that only a small percentage of the population, even now, has anything approaching a conventional pension plan. To some extent, it is every man for himself when it comes to planning for his sunset years.
The first dimension of this planning is having a roof over one’s head – thus real estate is typically the first major investment.
Another driver is the exchange of gold jewellery during weddings of children. Thus every household follows a regular and systematic investment in gold, thereby, inadvertently, executing a dollar cost averaging approach. (Dollar cost averaging is a term used to describe the drip-feed buying method of buying an investment, as opposed to buying chunks at a time.)
This is not necessarily a bad thing. Gold has historically upheld its value over long periods of time and it also serves as a forced saving.
Gold’s appeal lies in its tangibility as well as it being an effective inflation hedge, which can be important in emerging countries, like India, which often suffer from chronic inflation.
Still, although both gold and property certainly have a place in a well-diversified portfolio, by themselves, they are not enough.
What is needed? Mutual funds and bonds would be a good place to start – when used correctly. But even within the world of mutual funds, diversification is key, both in terms of asset class and geographic area.
It is important that you speak with your adviser before making any investment decisions, who can discuss developing a suitable balance of investments to match your attitude to risk.
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